What does a trustee do when an irrevocable trust needs to be modified? Circumstances or laws may have changed in ways that could not have been anticipated at the time the trust was drafted. In the past, a trustee who wanted to change some aspect of an irrevocable trust had few options, other than a court order to reform the trust which can be a costly and lengthy process. Now, many states have alleviated the necessity of court approval to modify trusts by permitting “decanting.” (For an example of such a statute, see our prior post, “How is an Illinois Trust Now Like a Fine Wine? It Can Be Decanted: A Summary of the New Illinois Decanting Statute”.)
Decanting is the term generally used to describe the distribution of trust property to another trust pursuant to the trustee’s discretionary authority to make distributions to, or for the benefit of, one or more beneficiaries. Decanting may be permitted by statute, by the terms of the original trust or by court-created law. Currently, Massachusetts has no specific decanting statute. However, in Morse v. Kraft, 466 Mass. 92 (2013), the Massachusetts Supreme Court authorized the trustee of the Kraft family trusts to decant the trust without the consent or approval of the court or any beneficiary. (more…)
Taxpayers/insureds are often surprised when they are taxed on the value of an old policy that was underwater, when it was transferred to them, causing them to assume that the policy had no value for the government to tax. Here again, the taxpayers in Schwab v. Commissioner (9th Cir. 2013), were surprised that they had recognized taxable income on the distribution to them of life insurance policies from their non-qualified plan, which had surrender charges that exceed their cash value.
Michael and Kathryn, a married couple, were employees of Angels and Cowboys, Inc., which sponsored a non-qualified multi-employer welfare benefit plan that was administered by a third party. Each of them caused the plan to purchase, with a single premium, a variable universal life insurance policy with a three-year no lapse guarantee. Just prior to the end of the three year no lapse period, due to a change in requirements for such an employee benefit plan, the plan terminated and the life insurance policies were distributed to Michael and Kathryn. However, the policies were both subject to substantial surrender charges at the time of the distribution that exceeded the policy cash value, so that nothing would be paid to either of them on a cancellation or lapse of the policy. At the time of the distribution, Michael’s policy would lapse in 54 days and Kathryn’s policy would lapse in 24 days unless each continued to pay the premiums due on the policies. $108,031 in premiums would need to be paid on Kathryn’s policy to keep it from lapsing, so she elected to let it lapse, and received nothing on the policy. Michael elected to pay premiums on his policy for a time to keep it in force. (more…)
The 7520 rate for March 2013 has risen to 1.40%.
The Federal Interest Rates for March can be found here.
St. Louis Partner Steve Daiker was quoted at length Jan. 25 by the Ladue News concerning when, why and how to modify life insurance policies in order to protect yourself and your family. Life insurance should be obtained at a young, healthy age to qualify for a lower premium, then policy holders should be mindful of when to update policies, Daiker said. Marriage, the birth of a child, divorce, retirement, even changes in the growth of a business all are events that may warrant a change in life insurance, he said.
The Tax Court in Neff v. Commissioner, TC Memo 2012-244 (8/27/2012) recently ruled on the income tax consequences of the termination of a split dollar life insurance arrangement (“SDLIA”), in ruling that the payment of a discounted amount by the employees on the termination of the SDLIA resulted in the recognition of income to the employees to the extent of the difference between the amount owed to the corporation under the SDLIA and the amount the employees paid. The Tax Court did not address the issue of the extent the equity portion of a SDLIA may be subject to income taxation on the termination of the SDLIA as that issue was not raised by the Service nor addressed by the Tax Court.
This case involves a pre-final regulation SDLIA to which the final regulations do not apply. Rather Rev. Ruls. 64-328 and 66-110 and Notice 2002-8 apply to determine the income tax consequences of the rollout of the SDLIA. Here the two employees/owners of the J & N Management Company (the “Company”) entered into split dollar arrangements whereby the Company was obligated to pay the premiums on six life insurance policies owned by the employees and family limited partnerships of the employees. In return, the Company was entitled to receive the lesser of the premiums paid and the cash value of the policies on the termination of the SDLIA. By the end of 2003, the Company had paid $842,345 in premiums and the cash value of the policies was $877, 432. The employees and the Company orally agreed to terminate the SDLIA with the employees paying the Company the discounted present value of the right to receive the premiums paid at the death of the employees. However, the Company was entitled to reimbursement of the premiums paid on the termination of the policy and were not required under the terms of the SDLIA to wait until the death of the employee to recover those funds. As a result of discounting the value of the Company’s entitlement, the employees paid the Company $131,969 instead of the $842,345 owed to the Company on termination of the SDLIA, and the Company released its interest in the policies. The IRS then included the difference of $710,376 in the taxable income of the employees for 2003 and assessed an income tax deficiency. (more…)
On Friday, President Obama and Vice President Biden convened Majority Leader Reid, Minority Leader McConnell, Speaker Boehner and Minority Leader Pelosi for an initial discussion on how to avoid the combination of tax hikes and spending cuts that make up the “fiscal cliff.” While President Obama has stated his goal is $1.6 trillion in higher revenue, there is no agreement on how much deficit reduction the negotiators want to achieve and how much of that should come from taxes. In the event an agreement is not reached, the parties are already discussing fallback plans for $60 billion to $100 billion in deficit reduction to replace automatic spending cuts set to take effect in January.
For more information on the Fiscal Cliff, see our prior post.
As discussed in our prior post, “2012 Gift Tax Opportunities: Wait to Gift, but Do Not Wait to Plan“, we discussed how the 2010 Tax Relief Act has provided a great opportunity for lifetime gifts to family members with a temporary increased estate and gift tax exemption of $5.12 million making these gifts potentially free of ever incurring gift or estate tax. The exemption will return to $1 million on January 1, 2013 unless Congress acts, and although most commentators think a return to $1 million is unlikely, there is a good possibility the exemption will be reduced. However, many people are reluctant to make gifts of their liquid assets, in case they might have need of them as the get older. Many people, therefore, are looking for ways of making a gift on a non-liquid asset, such as their home or another piece of real estate, such as a vacation home. Two methods of making such gifts are the Qualified Personal Residence Trust (a “QPRT”) and the Intentional Grantor Residential Trust.
A QPRT is an irrevocable trust, to which the Grantor transfers a residence (either his primary residence or a vacation home) while retaining the right to live in the transferred residence rent-free for a term of years (not for life). If the Grantor outlives the term, (more…)
Since Tom is back in the news this week, and because I finally watched Ghost Protocol this weekend, I thought I’d re-post this November 2011 blog on Tom Cruise’s possible use of life insurance in his estate planning. Keep in mind, based on any divorce settlement agreement he reaches with Katie Holmes, Tom’s need to maintain life insurance may change.
When I first saw this video of Tom Cruise performing his own stunts on the outside the Burj Khalifa in Dubai (the tallest building in the world), a mile and a half above the earth, for the movie Mission: Impossible — Ghost Protocol (aka Mission: Impossible IV), my first thought was, “Wow, how much life insurance do you think he has?” My next thought was “Think of the estate taxes his estate will have to pay on those life insurance proceeds if the life insurance isn’t held in a proper irrevocable life insurance trust.” (Yes, as my law school friends would say, that’s the estate planning nerd in me coming through!) (more…)
In French v. Wachovia Bank, N.A., 2011 WL 2649985 (E.D. Wis., July 6, 2011), the court issued an order granting Wachovia Bank’s (“Wachovia”) motion for summary judgment in an action by the beneficiaries of the French Trusts for breach of fiduciary duty. Wachovia was the successor trustee of the French Trusts that owned two whole life policies as well as significant other assets having a total value of about $30 million. Wachovia was appointed as such successor trustee in conjunction with its review of the policies and its recommendation to replace the whole life policies with a no-lapse John Hancock policy. The settlor (“French”) had his attorneys review the recommendation and provide him an analysis of the proposed exchange.
After an extensive year-long analysis of the advantages and disadvantages of the proposed policy exchange, including multiple detailed memoranda from his attorneys and discussions of the transaction with his attorneys and Wachovia, French completed the application for the exchange, which was then placed through an affiliate of Wachovia. The extensive discussion prior to the exchange included Wachovia’s conflict of interest in using an affiliate for the exchange, waivers of the conflict of interest by the beneficiaries, negotiations with Wachovia concerning a fee credit for the amount of the commission to be earned by Wachovia’s affiliate, the diminishing amount of cash value of the no-lapse policy, that such a policy was inappropriate if the policy would be cashed in prior to maturity, and that this policy provided a guaranteed death benefit and certainty as to performance that other trust investments lacked. However, Wachovia had not disclosed the amount of the commission ($512,000). (more…)
Nyet, we don’t mean the vodka. In the life insurance world, STOLI stands for “stranger owned life insurance.”
In Pruco Life Ins. Co. v. Brasner, Case No. 10-80804,U.S. Dist. Ct S.D. Florida, November 14, 2011, the court once again found that an investor or stranger who owned a life insurance policy lacked an insurable interest. In this case, Arlene Berger was interested in obtaining the lucrative cash payment that was the pot at the end of the rainbow of this life insurance arrangement, but with a net worth of under $1 Million, she really had no need for the life insurance. Ms. Berger learned of the life insurance arrangement from a free seminar she and her husband had attended, and she was referred to Mr. Brasner, who was a life insurance agent for Pruco.
Ms. Berger, through the help of Mr. Brasner, applied for the life insurance, but had no intention of paying any premium, and she knew the policy would be owned by someone else. (more…)